Packer rolls dice while reaching for Star

Date: May 10 2012

Ian Verrender

DEPENDING on which side of the fence you sit, gambling either is one of the great scourges of modern life or a fabulous means by which to earn a fortune. Either way, it has the capacity to disrupt the routine and force a sudden and unexpected change to the status quo.

James Packer's interest in Sydney's casino, The Star, has managed to do just that in the two industries in which he operates - gaming and media - as he attempts to increase his interest in the former and simultaneously back away from the latter.

Packer's Crown has increased its stake in Echo Entertainment - the company that owns and runs The Star in Sydney and Jupiters in Queensland - to 10 per cent, the maximum allowable under Echo's constitution, and has applied to the authority for permission to move beyond that. Therein lies the problem: how to achieve that end.

While investment bankers and stockbrokers have been salivating at the prospect of a takeover bid for Echo, the more likely scenario would be that Packer simply will push for a board spill.

It is believed Packer has continued to ''borrow'' stock in Echo in a complex financial transaction that means he is not required to disclose his interest. If correct, that would allow him to cement a dominant position in the casino operator should he be granted permission to move beyond the threshold. As the company's biggest shareholder, he would then be justified in demanding extra seats on the board in a move that would deliver effective control.

Packer's father, Kerry, was fond of the strategy, given it delivers control at minimal expense. But it can be fraught with difficulties, particularly when a large percentage of retail shareholders sit on the register. In the case of Echo, institutions account for about 75 per cent of the issued capital. That leaves 25 per cent in the hands of retail investors, enough to block a hostile bid and possibly enough to frustrate an attempt to wrest board control in a shareholder vote.

Working in Packer's favour is that a large proportion of those small investors are disengaged from Echo, having inherited their shares through the corporate split with Tabcorp. Add to that the general investor inertia when it comes to voting and Crown may get a board spill across the line.

The Star has been a hotbed of controversial allegations about sexual impropriety and lax standards within the new management, which opened the door for Crown's predatory advances. That culminated in a surprise plan in March to build a new $1 billion casino - utilising The Star's monopoly casino licence and Echo's balance sheet - in the Barangaroo precinct on Sydney Harbour.

Packer's best bet for convincing shareholders of the need for a shift in board control, should he be allowed to lift his stake, would be for a damning conclusion to an inquiry under way.

Aligned with Packer's ambitions to further his gaming interests has been his reported desire to exit his investment in pay television. Packer has been stunningly on the money in terms of his media plays in the past six years. He sold out of the Nine Network at the top of the market, reaping more than $5 billion, bought back into Ten Network for nickels and dimes when the industry was on its knees and now wants out of Foxtel.

In 2009, Kerry Stokes launched a raid on Packer's sole remaining media asset, Consolidated Media Holdings, snapping a 24 per cent stake in the company that holds a quarter-share in Foxtel and a half-share in Fox Sports. A truce finally was called, with Stokes gaining board representation. While Stokes would be the obvious buyer of Packer's 50.1 per cent share of the company, the usual rumours have been floated of competition for the stake, including Telstra. There's no doubt Telstra would be on the lookout for acquisitions. Courtesy of the federal government's broadband policy, it will receive $11 billion for handing over its landline hardware and customers to the NBN.

As a pure retailer of telecommunications, it will be hunting for content to send down those fibre-optic cables. Given it dominates pay television, it is more likely to seek other news and entertainment outlets, such as Fairfax Media, owner of this newspaper. Now valued at $1.65 billion, Fairfax has been restructuring to adapt to the new digital world after watching its classified advertising monopoly disappear down the internet. A decade ago, Telstra chairman Bob Mansfield tried to engineer a merger with the media group, only to be rebuffed by his own board, which eventually cost him his job.

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